The Retail Picture Comes Into Focus

Elbow your way through the throngs in Times Square to the tune of a dozen foreign languages and you may understandably reach one conclusion quickly: Retail is back, baby.

Some claim the biggest spending slump in decades has ended, as confirmed by a 6.4 percent surge in Black Friday sales across the country and the strongest November sales figures in years, according to the National Retail Federation. In terms of the local real estate industry, that means most prime empty spaces could be filled within the next year, brokers say.

New York is still king, but the rest of the world is holding up our throne. Forty-nine million tourists visited New York in 2009, a throng the size of South Korea. “That’s the icing on the real estate cake,” said Faith Hope Consolo, of Prudential Douglas Elliman.

But take a brisk five-minute walk beyond Times Square, to, say, 57th Street, and you can still swing a shopping bag without hitting a soul. The sobering reality is that away from the magnetic tourism pull of the Golden Horseshoe and swanky Fifth Avenue, brokers say some storefronts could stay empty for years.

The data on retail space are frustratingly thin. Critics say that brokers keep competitively advantageous information intentionally hidden; brokers say statistics don’t capture the challenge of finding the right tenant for each space, which can take months or years. For this report, The Commercial Observer compiled the available stats on vacancies, asking rents and major leases. We also spoke to brokers and landlords, as well as doing our own legwork surveying vacancies in major retail corridors.

Asking rents are rising, though vacancies also remain high. Brokers say this means we’ll see a flurry of activity next year, as pent-up demand starts to translate into more deals, and many cite examples of major unannounced leases. “The level of activity in the last several months has picked up,” said Karen Bellantoni of Robert K. Futterman & Associates, who’s represented Elie Tahari and J. Crew, to name just a couple of clients. “What you see is behind the scenes, deals are brewing on these prime streets.”

Asking Rents: Up

Party time in Times Square! Earlier this year Oakley agreed to pay a record-setting $1,400-per-square-foot rent for a spot in SL Green’s 1515 Broadway. Asking rents are also soaring in the area, according to a recent Real Estate Board of New York report, which said that average rents have climbed 21 percent to $1,700 a square foot since the spring.

But it’s not just the neon paradise that beckons. Asking rents also climbed on Bleecker Street, lower Broadway, and up and down Fifth Avenue, according to the board. Overall, Manhattan retail landlords are demanding on average $118 a square foot, or 4 percent more than in the spring, according to REBNY.

Even better news (for landlords, at least) is that tenants aren’t getting space at steep discounts as often. Jeffery Roseman, of Newmark Knight Frank, who brokered this year’s blockbuster Oakley lease, said he’s working on a deal in a neighboring building that will also command around $1,400 a foot in rent.

“For prime retail space, we’re seeing a race to the finish line,” said Nina Kampler, a senior managing director at CB Richard Ellis’ retail division. That makes it easier for landlords to get higher rents and offer fewer concessions.

It’s the Vacancies, Stupid

Still, it’s hard not to notice a big hole in REBNY’s report: vacancies. The board doesn’t track that data, Michael Slattery, a senior vice president at REBNY, told The Commercial Observer. “Brokers tell us that vacancies are not a critical factor,” he said. “If a tenant wanted to be at a certain location, even if the rest of the street was vacant, they didn’t care.”

But the New York Post‘s Steve Cuozzo, in a column last month, took the board to the woodshed for its sunny stats. “It’s just dandy that asking rents for retail spaces in certain tourist-trampled parts of Manhattan are rising,” he wrote. “To which most New Yorkers with eyes will respond: oh, please.”

Continuing: “It omits what’s obvious to any attentive pedestrian: namely, that oodles of vacancies exist within those supposedly white-hot zones as well. Worse, they’re proliferating, even at heavily trafficked corners. What a miserable signal they send at a time when New York’s status as world financial capital is jeopardized as never before.”

Even though New York has the second-lowest retail vacancy in the country, it’s still stubbornly high–even in the white-hot corridors. A Cushman & Wakefield report found that after a strong spring, vacancies were up in more than half the main shopping drags. Worst off was Madison Avenue, while Third Avenue is also still struggling with empty space.

Winners

Times Square

“Times Square is the center of the universe,” said Mr. Roseman of Newmark.

You’ve heard that one before, but it’s becoming increasingly true.

Shoppers from Buffalo to Belgium now skip sedate Fifth Avenue and trendy Soho and for mysterious reasons choose the belching consumerism of 42nd Street. Mr. Roseman’s record-setting Oakley lease is only part of the story. Overall, the vacancy rate in the area has continued to fall, and now sits at 9 percent. Some expect rents will keep rising toward the topmost rents that prime space on Fifth Avenue can command.

Robert K. Futterman has brokered two major leases totaling 120,000 square feet at the newly redeveloped Times Square Building. Mr. Futterman’s team also recently brokered 60,000 more square feet of leases, though he himself declined to provide details.

New tenants Bowlmor Lanes and Discovery Zone demonstrate that Times Square hasn’t lost its quirkier, more down-market side. Tenants “can pay less rent,” said Mr. Futterman, “and still get a big space and big presence.” More recently, the broker said that even some high-end fashion retailers have started eyeing the building, where asking rents are about $300 per square foot for ground-floor space.

Lower Fifth Avenue

It might be time to stop looking down on lower Fifth. Vacancies from 42nd to 49th streets fell more than any major retail area in the third quarter, from 13.9 percent to 6 percent year-over-year.

The upcoming debut of Joe Fresh, a down-market Canadian version of the Gap, at Fifth Avenue and 43rd Street, has created momentum for discount dealers. In addition, the block-long hole from 37th to 38th streets has been filled, according to George Constantin of Heritage Realty Services, which owns and manages the nearly 72,000 square feet of retail space.

The former CompUSA space has sat empty since December 2008, but Mr. Constantin will soon have leased the entire 72,000-square-foot space to different tenants and will also manage to triple the rent over what the previous tenant paid.

Downtown Brooklyn

Just a year or two ago, Brooklyn didn’t warrant a place on anyone’s list of retail hot spots. Now it’s impossible to leave it off.

The borough is rapidly becoming a foodie’s paradise, with Whole Foods, Shake Shack and Panera Bread all on their way. The spiffed-up Fulton Mall, including H&M and Aeropostale, seems destined to bring some long-overdue life to downtown Brooklyn in particular.

“Amazing creativity is coming out of Brooklyn right now,” said Michael Phillips of Jamestown Properties, which owns and manages the be@schermerhorn condo, amongst other properties in Brooklyn and Chelsea. He sees the future of retail in the borough as a hybrid of mega-chains and smaller local stores.

“In downtown Brooklyn, we’re seeing a great marriage of the two. It’s really the chicken-and-the-egg thing,” he added, noting that giants like to see smaller stores thriving, but the little guys also benefit from the ability of bigger stores to draw crowds to the area.

Grocery Stores

Let them eat organic seven-grain bread!

Grocery stores are always ravenous for space, so cheap recession rents and the possibility of major concessions have lured food sellers into neighborhoods that were previously too expensive for their taste. Grocery stores have been popping up all over Manhattan since the recession, from Trader Joe’s in Chelsea to Fairway on the Upper East Side.

“The prices have been more affordable,” said Mr. Futterman, speaking generally of big-box stores. “Tenants realize that they can do more sales volume in central parts.”

“High-end consumers were afraid to shop, afraid to vacation,” said Ms. Kampler, of CB Richard Ellis. “But the core consumer still has to eat, still has to buy shoes for their child.” In good times and bad, people have to eat, and they might as well enjoy sifting through six flavors of hemp ice cream.

Losers

Madison Avenue

Everyone who was anyone wanted to be on Madison Avenue when times were good. But the chichi neighborhood fell hard when investment bankers and their wives became too afraid or too ashamed to buy designer goods.

In the most recent quarter, Madison Avenue had the highest vacancy of the major retail areas, sitting at 11.1 percent, according to Cushman & Wakefield. Availability is up from last year, even though Uggs took space at 600 Madison and Agent Provocateur grabbed a spot at 675 Madison.

Ms. Consolo, of Douglas Elliman, briskly rejects the view that Madison Avenue’s heyday is passed (one can assume that among brokers at least, her sentiment is shared). “Let me tell you, that is simply not true,” she said. “It’s one of the most resilient streets in the neighborhood. Not only has it come back, but it’s come back stronger.”

The East Side

From the Bowery to 96th Street, the sun is not yet rising in the east.

A few years ago, Third Avenue in the 60s “was incredibly desirable, with very little vacancy,” said Ms. Bellantoni of RKF. But now that area “has been very difficult to lease,” she said.

Likewise, “Second Avenue’s been tough with the structure of the subway,” she said. Even the Lower East Side has been struggling, Ms. Bellantoni added. The area around the Bowery “was super, super hot,” she said, but “there’s been a slowdown.”

The good news is that’s opened the way for discount and food retailers like Fairway, which signed a 45,000-square-foot lease in Barnes & Noble’s former spot.

The Mega-Chain

When Starbucks announced in 2008 that it planned to close 600 stores across the country, it wasn’t the only bloated chain that had oversaturated its market.

But with the recession thinning the number of franchises around the city, European and out-of-state stores are diving into the New York market. Before, “it was like, we’ve already got 1,200 of those,” said Nina Kampler of CB Richard Ellis. “Now we’re looking for the next great retailer to come.”

Most prominent is Uniqlo’s mega-lease for 103,817 square feet on Fifth Avenue (previously it had one small location in Soho). Milan designer (via Miami) Tui Pranich, which just opened a location in Soho this fall, is already eying a second uptown spot. Brokers predict that Europeans will continue to make the Atlantic crossing, lured by the dependability of the New York market and the allure of being where high and faux fashion converge.

That might just be the most striking result of the recession, which has stripped away many of the effects of the boom. Core midtown neighborhoods are returning to prominence, and smaller retailers are returning, no longer as fearful of being trampled by giants.